Current market action looks similar to October 1987 crash: Chris Wood

Christopher Wood, the global head of equity strategy at Jefferies, believes that recent developments in the US Treasury have triggered a sell-off in global equity markets, reminiscent of the events leading up to the October 1987 stock market crash.

On October 19, 1987, the Dow Jones Industrial Average plummeted by 22.6 per cent in what later became known as Black Monday. Worldwide losses, as reported, were estimated at $1.71 trillion.

The potential similarity with the events of October 1987, Wood wrote in GREED & fear, his latest weekly note to investors, is that the historic stock market crash was preceded by a big sell-off in the 10-year Treasury over the summer months.

The 10-year Treasury bond yield rose by 203 basis points (bps), climbing from 8.2 per cent on June 17, 1987, to 10.23 per cent on October 15, 1987.
 

More recently, the 10-year US Treasury yield hit a 16-year high of 4.8 per cent, rising by half a percentage point in a fortnight. However, since then, yields have slightly cooled off to 4.71 per cent.

“The other salient point to note is that when the S&P 500 subsequently collapsed by 28.5 per cent in four days, and by 20.5 per cent on October 19, 1987, alone, the Treasury bond market staged a classic flight-to-safety rally in the context of a then-dramatic decline in the 10-year Treasury bond yield. The 10-year bond yield fell from a peak of 10.23 per cent on October 15, 1987, to 8.72 per cent on October 26, 1987,” Wood said.

Experts now suggest that European bonds are mirroring the US, with yields on Germany’s 10-year debt rising above 3 per cent for the first time since 2011 earlier this week. Japan’s 10-year yield has also reached a decade high, despite the Bank of Japan being prepared to buy $4.5 billion worth of bonds.

Nigel Green, chief executive officer of deVere Group, a global consulting firm managing nearly $12 billion in assets under management, cautions, “Investors need to be ‘on it’ when it comes to global bond market rout, as it could have far-reaching consequences, impacting various asset classes and investment portfolios, despite the situation having stabilised somewhat for the time being. The shift in investor preferences towards higher-yielding bonds can influence stock markets, potentially leading to equity market declines.”

Rising bond yields, combined with the US Federal Reserve’s (Fed’s) hawkish stance on interest rates amid firm crude oil prices, have already proven to be a triple whammy for global equity markets. Closer to home, the S&P BSE Sensex has shed nearly 2,300 points, or 3.5 per cent, from its 52-week high of 65,631.57 reached on September 15.

Meanwhile, according to Wood, the key question now is whether Treasury bonds would behave similarly in such circumstances, given the ongoing debate on ‘higher for longer’.

He wrote, “The near-term impact of GREED & fear’s still-anticipated Fed fudging of its 2 per cent inflation target will confirm that Treasury bonds, and most likely all other Group of Seven government bonds, are in a bear market, as has been GREED & fear’s view since early 2020.”

He believes that this bear market view of Treasury bonds is supported by the breaking of the trend line in the long-term chart of the 10-year Treasury bond yield going back to the beginning of the 1980s.

Wood wrote, “GREED & fear’s advice for now is for investors to keep an open mind on whether the continuing weakness in Treasury bonds reflects growing supply concerns. The real acid test will only come if Treasury bond prices fail to rally on bearish economic data, such as a sudden collapse in payrolls or, for that matter, a stock market crash. And that, clearly, has not happened yet.”